Tech Presentation Fall 2009
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Industry Analysis 10.14.09
TECHNOLOGY SECTOR
NASDAQ VS. S&P (YTD)
INDUSTRIES Internet Telecommunications Semiconductors Software Hardware IT Services
INTERNET INDUSTRY
Internet retail (ex. Amazon)
Cons
Pros
State efforts to tax online purchases Gas price declines Aggressive in-store sales strategies Heavy technology investment spending Strong value proposition Index up 88.3% (9/18/09)
Internet software & services
Con: Highly dependent on online marketing efforts
Discretionary expense
Pro: Index up 56.5% (9/18/09)
Projected to perform better than other internet companies
INTERNET INDUSTRY CONT.
Internet portals (Yahoo!, MSN, iGoogle) Rely
heavily on advertising Trend - difficult to convince consumers to pay for data, information, services, etc. Key ratios Price/sales
(price/revenue)
Profit isn’t as important as revenue in determining internet company stock price (so says the market!) Intrinsic value carries less weight than in other sectors
EV/EBITDA
TELECOMMUNICATIONS INDUSTRY
Networks, telephones, mobile phones, internet-linked PCs Deregulation in past decade (Telecommunications Act 1996 – stimulate competition in telecom industry) Transition from voice to text/images despite fact that telephone calls still account for biggest revenue generator in this industry Corporate customers are industry’s favorite Less price sensitive, more quality concerned Key ratios/terms EBITDA – Earnings before Interest, Taxes, Depreciation, & Amortization Tells you whether baseline business is profitable (cash is king) Churn rate – Rate at which customers leave for a competitor Average revenue per user (ARPU) Price/sales Little or no earnings for many companies (heavy infrastructure spending) Net debt/EBITDA – the lower, the better Size matters! Rapid depreciation (replace lines every 2 yrs.) and rapid technological change lead to huge costs, so small companies that pay bigger ones for connectivity are at serious disadvantage
SEMICONDUCTOR INDUSTRY
Prices in industry are very volatile and competitive 4 main product categories
R&D/Sales – the higher, the better
Memory Microprocessor Commodity integrated circuit Complex SOC(system on chip) Entails more profitable future
Book-to-Bill ratio – measures received semiconductor orders to orders actually delivered (bills) Demand is highly cyclical and heavily dependent on mobile phone, PC, other electronic equipment sales
SALES
Total Revenue = $248.6 billion in 2008(2.8% decrease) - first decrease since 2001 (technology bubble burst) Expectations were for 19% revenue decline in 2009 Normal pattern - strong 4th quarter, weak 1st quarter
PAST SALES RESULTS
YOY January drop was extremely high @ 31% decrease America sales down 11% in 2008 (2nd half down 21% YOY) Asia in 2008 was best in the semiconductor industry
DRAM AND NAND
DRAM revenues fell 23% in 2008 vs. 7% in 2007 Bad 2008 and price can’t stabilize NAND prices dropped 63% in 2008, 52% in 2007 DRAM prices dropped 53% in 2008, 49% in 2007 Production for both outpaced demand
CREE- LED LIGHTING
Cree is a technology leader in the manufacturing of light emitting diode (LED) chips, components, and lighting solutions. LEDs are mainly used in backlighting for mobile devices and automobile consoles. Cree's primary focus is to apply LEDs to more traditional means of lighting, such as homes and buildings. LED lights have much longer useful lives than commonly used incandescent or fluorescent light bulbs. While the up-front cost for LED installation is greater, LED lighting can save money for customers in the long run because LEDs last longer and use less energy than existing solutions. Commercial and industrial applications are particularly attractive and represent the largest portion of the illumination end market, since buildings are usually lit at all times and are primed to take advantage of the long lives of LED lights LED lighting is a fairly simple way for consumers to save energy.
AONE- LITHIUM A123 Systems, Inc- developer and manufacturer of advanced lithium-ion batteries and battery systems for the transportation, electric grid services and consumer markets Lithium for hybrid cars and extended battery life
SOFTWARE
2 Types:
2008 – 48% of software sold outside of US
software growth depends on global economic growth
Software purchases to remain unchanged from 2008 to 2009; better than other technology industries Types of Revenue:
System Software - control the computer (operating system) Application Software - lets computer perform function, developed by outside
License Maintenance Service Subscription
License revenues expected to be sluggish, but maintenance revenues continue to rise M&A will continue (Oracle) Look for: GDP, exchange rates, consumer confidence, product cycles, hardware sales
HARDWARE INDUSTRY
How to analyze? In a word, compare Numbers How
and ratios do not stand alone
are competitors doing– Growing more? Less? The same? Market strategies– How effectively is the company promoting its products? Product differentiation– Is the product offered unique in any way from competitors?
MEETS EXPECTATIONS?
Is the company on par with fast-paced advances of today? Example
from S&P Net: IBM, Dell, Digital Equipment Corporation used to be a dominant player in hardware industry, but did not deliver products to reflect industry trends. As a result, poor reflection in financials
KEY CONCEPTS
Research and Development (R&D)– Does the company effectively spend money on advancing products offered? Growth prospects– How well is the company predicted to grow in near and distant future ? Competitive edge– Does the company stand out from competitors by products offered or marketing strategies used? Gross Profit Margin– How well is the company able to pay for other expenses aside from cost of goods sold? Operating Margin– How well is the company able to make profit per dollar of sales?
Note from S&P Net: Hardware industry operating margins have been volatile in past several years
Return on assets and equity– How much profit is the company generating for every dollar in assets and contributed capital?
Higher internal efficiency higher ROA/ROE
IT-SERVICES
Income Statement Revenue Gross
Margin
Balance Sheet Free Cash Flow Contracts & Contract Backlogs External Factors: Interest Rates, Real GDP Growth
CURRENT INDUSTRY CONDITIONS / TRENDS
Smaller corporate IT spending budgets Federal government raises IT spending International outsourcing U.S. IT companies expanding abroad Hardware companies heighten focus on services
QUESTIONS?
TECHNOLOGY SECTOR
NASDAQ VS. S&P (YTD)
INDUSTRIES Internet Telecommunications Semiconductors Software Hardware IT Services
INTERNET INDUSTRY
Internet retail (ex. Amazon)
Cons
Pros
State efforts to tax online purchases Gas price declines Aggressive in-store sales strategies Heavy technology investment spending Strong value proposition Index up 88.3% (9/18/09)
Internet software & services
Con: Highly dependent on online marketing efforts
Discretionary expense
Pro: Index up 56.5% (9/18/09)
Projected to perform better than other internet companies
INTERNET INDUSTRY CONT.
Internet portals (Yahoo!, MSN, iGoogle) Rely
heavily on advertising Trend - difficult to convince consumers to pay for data, information, services, etc. Key ratios Price/sales
(price/revenue)
Profit isn’t as important as revenue in determining internet company stock price (so says the market!) Intrinsic value carries less weight than in other sectors
EV/EBITDA
TELECOMMUNICATIONS INDUSTRY
Networks, telephones, mobile phones, internet-linked PCs Deregulation in past decade (Telecommunications Act 1996 – stimulate competition in telecom industry) Transition from voice to text/images despite fact that telephone calls still account for biggest revenue generator in this industry Corporate customers are industry’s favorite Less price sensitive, more quality concerned Key ratios/terms EBITDA – Earnings before Interest, Taxes, Depreciation, & Amortization Tells you whether baseline business is profitable (cash is king) Churn rate – Rate at which customers leave for a competitor Average revenue per user (ARPU) Price/sales Little or no earnings for many companies (heavy infrastructure spending) Net debt/EBITDA – the lower, the better Size matters! Rapid depreciation (replace lines every 2 yrs.) and rapid technological change lead to huge costs, so small companies that pay bigger ones for connectivity are at serious disadvantage
SEMICONDUCTOR INDUSTRY
Prices in industry are very volatile and competitive 4 main product categories
R&D/Sales – the higher, the better
Memory Microprocessor Commodity integrated circuit Complex SOC(system on chip) Entails more profitable future
Book-to-Bill ratio – measures received semiconductor orders to orders actually delivered (bills) Demand is highly cyclical and heavily dependent on mobile phone, PC, other electronic equipment sales
SALES
Total Revenue = $248.6 billion in 2008(2.8% decrease) - first decrease since 2001 (technology bubble burst) Expectations were for 19% revenue decline in 2009 Normal pattern - strong 4th quarter, weak 1st quarter
PAST SALES RESULTS
YOY January drop was extremely high @ 31% decrease America sales down 11% in 2008 (2nd half down 21% YOY) Asia in 2008 was best in the semiconductor industry
DRAM AND NAND
DRAM revenues fell 23% in 2008 vs. 7% in 2007 Bad 2008 and price can’t stabilize NAND prices dropped 63% in 2008, 52% in 2007 DRAM prices dropped 53% in 2008, 49% in 2007 Production for both outpaced demand
CREE- LED LIGHTING
Cree is a technology leader in the manufacturing of light emitting diode (LED) chips, components, and lighting solutions. LEDs are mainly used in backlighting for mobile devices and automobile consoles. Cree's primary focus is to apply LEDs to more traditional means of lighting, such as homes and buildings. LED lights have much longer useful lives than commonly used incandescent or fluorescent light bulbs. While the up-front cost for LED installation is greater, LED lighting can save money for customers in the long run because LEDs last longer and use less energy than existing solutions. Commercial and industrial applications are particularly attractive and represent the largest portion of the illumination end market, since buildings are usually lit at all times and are primed to take advantage of the long lives of LED lights LED lighting is a fairly simple way for consumers to save energy.
AONE- LITHIUM A123 Systems, Inc- developer and manufacturer of advanced lithium-ion batteries and battery systems for the transportation, electric grid services and consumer markets Lithium for hybrid cars and extended battery life
SOFTWARE
2 Types:
2008 – 48% of software sold outside of US
software growth depends on global economic growth
Software purchases to remain unchanged from 2008 to 2009; better than other technology industries Types of Revenue:
System Software - control the computer (operating system) Application Software - lets computer perform function, developed by outside
License Maintenance Service Subscription
License revenues expected to be sluggish, but maintenance revenues continue to rise M&A will continue (Oracle) Look for: GDP, exchange rates, consumer confidence, product cycles, hardware sales
HARDWARE INDUSTRY
How to analyze? In a word, compare Numbers How
and ratios do not stand alone
are competitors doing– Growing more? Less? The same? Market strategies– How effectively is the company promoting its products? Product differentiation– Is the product offered unique in any way from competitors?
MEETS EXPECTATIONS?
Is the company on par with fast-paced advances of today? Example
from S&P Net: IBM, Dell, Digital Equipment Corporation used to be a dominant player in hardware industry, but did not deliver products to reflect industry trends. As a result, poor reflection in financials
KEY CONCEPTS
Research and Development (R&D)– Does the company effectively spend money on advancing products offered? Growth prospects– How well is the company predicted to grow in near and distant future ? Competitive edge– Does the company stand out from competitors by products offered or marketing strategies used? Gross Profit Margin– How well is the company able to pay for other expenses aside from cost of goods sold? Operating Margin– How well is the company able to make profit per dollar of sales?
Note from S&P Net: Hardware industry operating margins have been volatile in past several years
Return on assets and equity– How much profit is the company generating for every dollar in assets and contributed capital?
Higher internal efficiency higher ROA/ROE
IT-SERVICES
Income Statement Revenue Gross
Margin
Balance Sheet Free Cash Flow Contracts & Contract Backlogs External Factors: Interest Rates, Real GDP Growth
CURRENT INDUSTRY CONDITIONS / TRENDS
Smaller corporate IT spending budgets Federal government raises IT spending International outsourcing U.S. IT companies expanding abroad Hardware companies heighten focus on services
QUESTIONS?
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